Vietnam was supposed to be the lair of the next Asian Tiger. Ripe for development, open for business, and with a young population eager for the homeland to emulate the economic miracle of its giant neighbour China.

There were all the early signs of growing affluence — Western designer stores such as Louis Vuitton and Burberry — flocked to the nation’s cities and Western investors and bankers were drawn too.

But any visitor to Ho Chi Minh City, formerly Saigon, can see that Vietnam is still far from a modern economy.

By 10 p.m. the streets are dark and free of pedestrians, shops are shuttered and there are few lights on in any buildings, a result of the government’s campaign to conserve energy. The airport at Ho Chi Minh is near empty and a handful of cars own the road downtown, even though this is a city of seven million people — three times the size of Toronto.

Vietnam’s recent economic data is equally dismal, as rampant optimism has given way to a more realistic view of the country’s future.

The country’s stock market is the worst performer in Asia this year, with the benchmark index tumbling by about 67%. Real estate prices in Hanoi, the capital, and Ho Chi Minh City, the country’s economic hub, have fallen too.

Early in the year, inflation was Vietnam’s main concern, reaching 28% by August. Inflation eased slightly to 24.2% in November, and growth is now the big issue. Vietnam sells about one fifth of all exports to the U.S., and like its emerging Asian neighbours, the country will suffer if a prolonged global slowdown inhibits foreign investment and limits the developed world’s appetite for cheap exports.

“A deeper global downturn — especially in advanced economies which account for the bulk of Vietnam’s total exports and remittances — will have a material impact on Vietnam,” said IMF assistant director for the Asia and Pacific Department Shogo Ishii in Hanoi this week.

In an effort to stimulate a sputtering economy, the State Bank of Vietnam, which raised interest rates throughout the first half of 2008, has now cut its benchmark interest rate four times since late October. Still, gross domestic product growth is expected to slow from 8.5% in 2007 to 5% this year and 4% in 2009, according to Asian brokerage CLSA.

“The current account deficit is headed for an ugly 19% of GDP this year,” said CLSA analyst Anthony Nafte in a report. Vietnam faces “a long road out of crisis,” he added.

In the early part of 2008, there were plenty of optimists ready to ignore the teething problems of Vietnam’s emerging economy.

Back in April, Goldman Sachs re-affirmed the “next Asian tiger in the making” tag in a report that said Vietnam’s GDP will grow at an average of 8% over the next 14 years.

“We share concerns on the potential risks, including the recent surge in inflation, and challenges in fiscal and monetary policies,” the report from Goldman Sachs noted. “Nevertheless, we are cautiously optimistic about Vietnam’s economic growth given its solid reform path so far.”

Indeed, the communist country, which started on a path to economic liberalism in the mid-1980s, very recently began to make much bigger strides, especially after it was admitted to the World Trade Organization last year.

In particular, Vietnam has plentiful cheap labour and began to open up that resource just as factories in China were hit with costly new labour laws that made them less competitive.

As suitors from richer nations came knocking, Vietnam saw inward foreign investment soar. The country became the biggest beneficiary of private equity deals in South East Asia during 2007 and the first half of 2008, according to a report from consultants Deloitte. Almost a third of all private equity deals in South East Asia during that period were in Vietnam.

But that was only part of the story, and Vietnam certainly had its problems, even before the full extent of the global economic slowdown emerged later in the year.

There’s a growing gulf between rich and poor, as well as a massive skills shortage across many sectors. “If the skill level in Europe is 100% then Vietnam is 30%,” says Matthias Duehn, a German lawyer with DFDL Mekong based in Ho Chi Minh City.

Corruption is another major problem, ranked the second most important business issue facing Vietnam by foreign investors surveyed in a recent Economist Intelligence Unit poll. A measure of the international concern about this issue is that Japan, which pledged US$1.1-billion in low interest development loans to Vietnam last year, this week froze further lending to Hanoi until the government takes “meaningful” steps to eradicate corruption in its public works programs.

Above all, Vietnam has a dearth of the sort of infrastructure needed to tempt more manufacturers from China’s Guangdong province and other low cost regions in Asia to build factories here instead.

A Hong Kong-based private equity player who made a recent trip to Vietnam full of anticipation returned realizing it would be a decade or more before the country is ready to compete with Southern China’s manufacturing base.

The main highway between Ho Chi Minh City and Hanoi — a distance of more than 1,110 kilometres — is narrow and uneven. There’s no subway or public transit to speak of in Ho Chi Minh City, where the roads are clogged with pollution emitting scooters, and rail travel is not consistent. Though Vietnam is rich in oil, it has no refineries — the first is planned to open next year — and so it is a net importer of a resource of which it has plentiful reserves.

The Vietnamese government recently announced it will spend US$2.2-billion to upgrade the country’s waterways by 2020. But for now Vietnam’s ports are not nearly deep enough to carry the massive container vessels that carry global manufacturing shipments.

“You can get lots of cheap labour to make running shoes but that’s no good if you don’t have a deep enough port to ship the shoes out of the country,” says Mr. Duehn.

Big retail chains like Carrefour and Wal-mart have not yet set up store in Vietnam, a sign of how far the country lags behind other Asian nations. Despite recent reports to the contrary, a Wal-mart company spokesperson told the Financial Post the U.S. giant has no specific plans to move into Vietnam. The U.S. retail giant has more than 200 stores in China.

Also it is impossible to place Vietnam on the Big Mac Index — a widely used back-of-the-envelope way to compare cost of living in two places based on the cost of a McDonalds’ burger. The ubiquitous U.S. fast food chain has not yet made it here. Nor can you meet for a chat in Starbucks because the coffee chain, which even had an outlet in Beijing’s forbidden city until last year, does not have a single store in Vietnam — though Highlands Coffee, a local chain started by Vietnamese-born American David Thai, does a decent imitation.

To the Vietnam optimists, this represents opportunity. Retailers, including Canadian retailers, “should be very, very concerned about Vietnam,” says Thomas Delahaye, Vietnam director for Canadian strategy consultancy Secor Group.

“People have enough money to buy a motorbike, a television and maybe send their kids to an English school. Five years ago it was not possible,” adds the young Frenchman.

Indeed, what most attracts many foreign investors is the country’s potential. In particular, Vietnam has some of the most favourable demographics on the planet. The country has 85 million people, three-quarters of whom are not yet 35-years old. The average age is just 25. There are one million Vietnamese babies born each year and one million people joining the workforce every 12 months. There are high levels of education, literacy, and English. And in Ho Chi Minh City and Hanoi at least, per capita GDP has already passed US$1,000 — the magic mark that is often perceived to be the first step toward a modern consumer society.

Also in Vietnam’s favour, the country enjoys relative political stability, which recent unrest in Thailand only goes to underline. Despite widespread corruption and concerns about press freedoms and the rule of law, Vietnam has also proven to be open to foreign investment in recent years — exports and imports equal a massive 160% of GDP.

In fact, Western business leaders ranked Vietnam as “providing the broadest range of opportunities [of any South East Asian nation] across most sectors in the next three years, from consumer goods and healthcare to IT,” according to a survey by The Economist Intelligence unit.

Looking for another way to measure the country’s progress, Mr. Delahaye points to the consulting sector he works in. The big international consultancy firms like Bain, McKinsey and Boston Consulting Group have not yet set up permanent bases in Vietnam, he says. With so many business problems to solve, it’s only a matter of time before they get here.